The Normative Efficiency Ranking of Output and Export Subsidies under Costly and Imperfect Enforcement

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Abstract

This paper builds on the literature on agricultural policy analysis under costly and imperfect enforcement by analyzing the effect of enforcement costs and noncompliance on the relative transfer efficiency of output and export subsidies. Analytical results show that, in addition to changing the incidence of output and export subsidies, relaxing the assumption of perfect and costless enforcement found in the traditional analysis of these policy instruments can affect their relative efficiency in transferring income to producers. The effect of enforcement issues is shown to depend on the way export subsidies are being administered and the size of the exporting country.

Traditional analysis of farm subsidies takes place under the assumption that farmers comply folly with the provisions of the programs, or alternatively, that policy enforcement is perfect and costless. In such a world, the welfare effects and the efficiency of output and export subsidies in transferring income to producers depend on market conditions, the production share consumed domestically, the deadweight losses from taxation, and the level of government intervention in agriculture (see Gardner 1983, 1987, 1995; Alston, Carter and Smith 1993, 1995).

Policy enforcement is not costless, however, and, as far as government programs are concerned, it is far from being perfect (Giannakas, 1998). When imperfect enforcement generates adverse economic incentives, foil compliance with program provisions is by no means assured. Under an output or an export subsidy scheme, for instance, subsidy recipients might find it beneficial to misrepresent their production or exports and collect government payments on greater quantities than those actually produced or exported.

Giannakas (2003) and Giannakas and Fulton (2000a, 2000b) relax the unrealistic assumption of perfect and costless enforcement found in the traditional analysis of output and export subsidies and analyze the effects of introducing enforcement costs and noncompliance into the economic analysis of these policy instruments. A key result of these studies is that the economic effects of enforcement costs and noncompliance are policyspecific. For instance, while the efficiency in redistribution1 of output subsidies increases with the extent of farmer noncompliance, the effect of enforcement costs and misrepresentation on export subsidies depends on the way the policy is implemented. In particular, while the explicit consideration of enforcement issues reduces the transfer efficiency of export subsidies when those are paid to trading firms, it increases the transfer efficiency of export subsidies paid directly to the producers of the regulated commodity.

An important implication of these results is that enforcement costs and misrepresentation alter the relative transfer efficiency of output subsidies and export subsidies paid to trading firms. Since enforcement issues increase the transfer efficiency of output subsidies while reducing the transfer efficiency of export subsidies paid to trading firms, they increase the relative efficiency of output subsidies in redistributing income in the economy. This is quite significant as it implies that accounting for costly and imperfect enforcement increases the likelihood that an all-or-nothing policy choice between output subsidies and export subsidies paid to trading firms will favor the former.

The effect of enforcement issues on the relative transfer efficiency of output subsidies and export subsidies paid to producers of the subsidized commodity are far from obvious, however. The reason is that the incorporation of enforcement costs and noncompliance into the economic analysis of these policies results in both policies being more efficient means of income redistribution than it is traditionally believed. …